3 3 Supporter Share Ownership Executive Summary The case for encouraging greater levels of collective supporter share ownership, primarily via the supporters trust model in football, has been strengthened still further in recent years. There are an increasing number of good examples of supporter ownership, both in England and throughout Europe. Memorably, the 2012/13 Champions League was contested by FC Bayern and Borussia Dortmund, two clubs owned by their members. In England, Portsmouth Supporters Trust took majority control of their club via a local consortium in 2013, demonstrating both the potential of the supporters trust model, but also many of the barriers to greater levels of collective supporter shareholdings. Political support for this agenda has also grown, not least through manifesto pledges from all three major parties at the 2010 election. The on-going Culture, Media and Sport Select Committee Football Governance inquiry recognised the value of supporter ownership, and the need to encourage its further development. It recommended measures that increase their [supporters trusts ] ability to raise money; and measures that increase the opportunity for supporters trusts to achieve a share in their club, whether on a minority or majority basis. 1 This highlights barriers to increasing the levels of collective supporter share ownership in football and makes recommendations about how new opportunities to facilitate supporter ownership can be taken. The paper s central proposal is for the creation of a Community Football Fund which would be established as a social investment intermediary capable of securing various forms of social investment to assist supporter ownership. Also proposed are measures such as tailored tax relief for supporter-led takeovers and pre-emption opportunities for supporter share purchases. Supporters Direct and the trust movement have been at the forefront of these developments, and this paper sets out our position on how to take the next step towards widespread supporter ownership of clubs.

4 4 1. Introduction Supporter share ownership is increasingly important to the future sustainability of football as a spectator sport. Supporter involvement and ownership has the potential to transform the business model of football, from one that is unstable, reliant on debt and/or benefactors and unsustainable to a more robust distributed ownership model, engaging fans as investors, customers, and fully committed supporter-members. This report presents the options for supporter share ownership in football, ranging from full community ownership and investment, to schemes which involve supporters in minority share ownership and share schemes. The report identifies the barriers supporter share ownership faces, and the potential solutions to these barriers. It also makes a series of recommendations for policy makers, who want to see more supporter share ownership in the future. The report makes a cornerstone proposal for the development of a new Community Football Fund, involving the Big Society Bank and Big Lottery Fund, to enable supporter ownership. Supporters sustain sport not only through economic investment but also through countless hours they devote to volunteering and participation at their clubs. This is a vital part of the role that sport can play in building stronger communities. At the same time the relationship between supporters and their club constitutes one of the fundamental specificities of the sport sector relative to other economic activities. The work of Supporters Direct Europe shows how fans can help to develop inclusive and sustainable structures at both their grass roots and professional levels, giving life to the concept of active citizenship and demonstrating how supporters can contribute to better governance and long term sustainability in sport. 1.2 Demand for supporter share ownership 1.1 Rationale for supporter ownership Research conducted by Substance for Supporters Direct over a number of years has demonstrated that supporter/community ownership of football clubs can help: Improve governance in football, by creating more democratic, transparent and accountable structures. Make clubs more financially sustainable by living within their means. Deliver greater social value or community benefit for the local communities in which they operate. Engage a wider groups of stakeholders in a meaningful way, generating opportunities for volunteering, democratic participation, skills development and taking responsibility. This has been recognised both within the UK and across Europe. In the UK, the Culture, Media and Sport Parliamentary Select Committee recommended: Supporters trusts have become an increasingly significant and successful model for club ownership and can have a beneficial influence on, particularly financial governance. 2 Ms. Androulla Vassiliou, the European Commissioner for Education, Culture, Multilingualism, Sport, Media and Youth said: Supporter ownership of football clubs is a concept that has increased in popularity, credibility and profile in the UK in recent years. At a policy level, in the 2010 general election all three major parties made promises about encouraging supporter ownership of football clubs, whilst the Coalition s Programme for Government pledged to: Encourage the reform of football governance rules to support the co-operative ownership of football clubs by their supporters. Amongst football supporters, the demand for greater levels of collective supporter ownership of clubs is clear. Supporters Direct s mission statement is to promote sustainable spectator sports clubs based on supporters involvement and community ownership. Supporters Direct works with over 170 supporters trusts that have a combined membership in excess of nearly 400,000 people across Europe. There are about 299,000 individual trust members and 99 supporters trusts in England alone with an additional 22 supporter owned football clubs also in membership. Over the years SD has developed its expertise in helping supporters trusts to acquire influence and ownership in the clubs they support. This demand has been turned into ownership of clubs: 17 clubs in the English pyramid are wholly owned by supporters including Wrexham AFC, AFC Telford United, Wycombe Wanderers FC, and FC United of Manchester.

5 5 5 clubs are majority owned by supporters including AFC Wimbledon, Portsmouth CFC and Exeter City FC. 16 clubs are partially owned by supporters including Swansea City FC in the Premier League and Grimsby Town FC, Carlisle United FC and Dorchester Town FC. Supporters trusts have also raised large amounts of capital, often from a relatively small fan base. AFC Wimbledon supporters raised 1.26m to buy their Kingsmeadow Stadium in FC United of Manchester members have so far raised in excess of 2m ( 1.75m via community shares ) to help fund the building of their stadium and community facility. Wrexham supporters raised about 750k to take 100% ownership their club in 2012 after years of instability at their clubs. Most recently, Portsmouth Supporters Trust has secured over 2m to take a majority shareholding in their club, Portsmouth FC. The demand from supporters to extend this ownership is very strong. Research conducted by YouGov for Coops UK 3 suggested that: 83% of Manchester United fans and 72% of Liverpool fans who expressed an opinion felt their club would be in better hands if it was owned co-operatively. Across the country 56% of fans, who gave an opinion, feel the same way. On average supporters would be prepared to personally invest 414 in a cooperative in order to save their club from administration. Community Ownership definition The working definition of community ownership that Supporters Direct use is; A minimum of 50% +1 of the voting rights of the Club is controlled collectively by a democratic entity which has an open and inclusive membership. Any profits within the majority controlling entity are reinvested back into the Club as opposed to being distributed to shareholders/members. The Club is committed to running as a sustainable business. 1.3 Report Structure The report is structured into six sections including this introduction. There is also a feature case study on Portsmouth Football Club, which was recently acquired by Portsmouth Supporters Trust through the purchase of a majority stake in the club. Section 2 Supporter Share Ownership Structures: This section outlines the different corporate structures that can be used to facilitate supporter ownership, focusing on Community Benefit Societies (CBS) and Community Interest Companies (CICs), as well as addressing a range of other structures in football in which supporters have sought to gain ownership stakes. Section 3 Raising Community Finance: All football clubs need a mix of capital, getting the right blend of equity, debt and retained profits. This section explores how community investment can be encouraged through the offer of community shares, community bonds, community fundraising and crowd funding. Section 4 Share ownership and Financial Regulation For supporters to be able to buy shares in football clubs, club owners must first be willing to sell their shares, or agree to clubs issuing more shares. Financial regulations and company law restricts the scope for private limited companies to sell shares to the public. Although schemes such as Arsenal Fan Share have been developed to give fans a stake in the club they support, there are very limited opportunities for this to happen and significant barriers to be overcome. Section 5 Towards a Community Football Fund: This section outlines the report s cornerstone proposal for a Community Football Fund which could address the barriers faced by supporters trusts seeking to secure the community ownership of football clubs through supporter share ownership. It includes important proposed roles for Big Society Capital and the Big Lottery Fund. Section 6 Key Recommendations: With all the main political parties pledged to encouraging democratic supporter ownership, the report concludes with a summary of recommendations on how barriers to supporter ownership can be overcome. In each case of supporter ownership or finance raising, regulatory issues have emerged that need to be addressed if supporter ownership is to be effectively encouraged. Feature Case Study: Portsmouth Football Club. In July 2013 Portsmouth Supporters Trust acquired a 60% stake in Portsmouth Community Football Club, for an investment of more than 2 in community shares. Their experiences stand as a powerful example of many of the barriers and solutions highlighted in this report.

6 6 Section 2: Supporter Share Ownership Structures This section outlines: i. The connection between corporate law, share ownership and investment. Community ownership is not a legally defined term, but there are two legal forms, which provide a starting point for community ownership: community benefit societies (CBSs) based on IPS law and community interest companies (CICs) based on company law. These forms are explored in greater detail below. 2.2 Community Benefit Societies (CBSs) ii. iii. iv. Why Supporters Direct (and other agencies) regard community benefit societies as a good legal form for supporter ownership of football clubs. Some of the drawbacks of using the CIC form for supporter ownership. A brief review of other legal forms currently used by football clubs, and how these relate to supporter ownership. There are two reasons why IPS law is suited to community ownership. It provides a legal basis for the democratic rights, responsibilities and rules of association for members. It also provides for a unique form of share capital called withdrawable shares. Crucially, all members have only one vote, regardless of how much they have invested; and although interest on shares can be paid, this is limited to what is deemed sufficient only to attract and retain the investment. 2.1 Corporate law In order to fully appreciate the options for structuring supporter share ownership in football clubs it is first necessary to understand a little about corporate law. Corporate law is important because it determines who owns and controls an enterprise, and how this ownership and control is exercised. Corporate law provides a legal identity to an enterprise. This identity is distinct from the identity of its members and owners. It limits the liability of members to what they have invested in the enterprise in the form of share capital. Share capital is fully at risk. Shareholders are the last in the line of creditors, and if the enterprise fails, shareholders could lose some or all of the money they have invested in share capital. There are two main bodies of corporate law in the UK; company law and industrial and provident society (IPS) law. Both provide an enterprise with limited liability status, and both make arrangements for members, as shareholders, to exercise control over the enterprise. However, company law and IPS law are very different in how shareholders control an enterprise. Company law embodies the principle of one-share-one-vote, whereas IPS law embodies the principle of one-member-onevote. Most football clubs are structured as companies. Indeed, the Football League and the Premier League requires clubs to be structured as companies, because of differences in the way in which insolvency is handled in a company, compared with a society. Under IPS legislation there are two main forms of society - a co-operative society, and a community benefit society. The main difference between these two types of society is that co-operative societies exist for the benefit of their members and must subscribe to internationally recognised principles of co-operation, whereas CBSs have wider community benefits as core objectives of the society. CBSs may choose to subscribe to international principles of co-operation and become full members of the federal body Co-operatives UK, to underline their co-operative credentials. The CBS form of society is better suited to community ownership of football clubs than a co-operative society because it aims to serve the interests of the whole community, and not just the members of the co-operative. All supporters trusts and many supporter-owned clubs are formed as a CBS with obligations to benefit the wider community as well as the club and supporters. As such a CBS is the corporate form under IPS legislation that is most relevant here. The defining features of a CBS are that it: Has objects that its purpose is to benefit its community. Is based on one member one vote. Has a membership that is open to anyone to join. Is registered with and regulated by the Financial Conduct Authority mutual register. It is non-profit distributing. It allows for a statutory asset lock which means a club s assets cannot be sold for private (members ) gain.

7 7 2.3 Community Interest Companies (CICs) Community Interest Company regulations were introduced in 2005 and provided an alternative under company law so that a company could be formed that serves the interests of communities, rather than financial interests of shareholders, and also restricts the private financial benefits of membership. Fundamentally, a CIC is a regulated form of company, and is fully subject to company law. A CIC can be formed as a company limited by shares (CLS), a public limited company (Plc), or a company limited by guarantee (CLG) 4. However, they have features to safeguard the interests of the community they were set up to benefit: A CIC has to have articles and carry out activities which fulfil a community purpose, thus meeting the so-called community interest test. A CIC also has a statutory lock on its assets written into its articles of association to prevent residual profits from being distributed to its members or shareholders. The company must include Community Interest Company or CIC in its name. There are limits on dividends to shareholders, currently 20%, provided that its community objectives have been met. CICs that are structured as a CLS or Plc can issue shares but work to the principle of one-share-one-vote, thus allowing an individual, entity or small group of people to have overall control. In common with all companies, shares in CICs are normally transferable, although they also have the power to issue redeemable shares. 2.4 Comparing community ownership structures i) Advantages of a CBS Structure Supporters Direct in England recommends the CBS structure for community ownership because it provides: A robust, democratic structure for community ownership and investment. All of the advantages of incorporation, such as limited liability status. The ability to issue withdrawable shares. One-member-one-vote regardless of how many shares are held. A non-profit distributing structure. Withdrawable shares are a critical element because they allow supporters to invest in supporters trusts and/or clubs in the knowledge that they can in the longer term probably have opportunities to cash-in their shares, subject to conditions set out in the rules of the society. This is an important advantage over transferable shares issued by companies, including CICs, where it can be extremely difficult to find a buyer for a relatively small number of shares. However, withdrawable share capital is subject to the following conditions: a) Withdrawable shareholdings are limited to 20,000 per member. b) Interest can be paid on share capital, but only at a rate that is sufficient to attract and retain the investment. c) Members can withdraw their share capital from the society, but subject to terms and conditions laid down by the CBS (e.g. notice period, total amount of capital to be withdrawn in any one financial year). c) They cannot increase in value (but in some instances can go down). Four major advantages of withdrawable shares in football are that: Their non-speculative form (they cannot be traded or increase in value) means it helps prevent football clubs being used for speculative purposes by individuals or companies. The limit on interest payable on shares to a rate sufficient to retain the investment, helps prevent large amounts of a club s surplus being paid out to private individuals or corporations. A statutory asset lock further reinforces the nonspeculative nature of withdrawable share capital because even if the society was sold for above its net asset value, the residual value could not be distributed amongst members. The share offer must be primarily for community benefit, ensured by how the club is subsequently managed. Another major advantage of a CBS is that it is exempt from financial regulation when promoting the sale of withdrawable shares to the general public, which means that it is cheaper and more straightforward for community groups to raise equity capital. CICs are not exempt from this financial regulation.

8 8 ii) Advantages of a CIC Structure Key Recommendations: CICs are a better model for football clubs than normal company forms because they prioritise community benefit over financial return. The limit on the payment of dividends, set at 20%, and only payable once community benefit objects are met, would help to prevent clubs being used for speculative purposes and helps retain reinvestment. However it should be noted that the ceiling is still very high for a football club, although the members could choose to lower this ceiling. A CIC is flexible in that it can be formed in one of three ways CLS, CLG or Plc. A CIC also has the advantage that it meets the Football League s requirement that it can enter into a Company Voluntary Arrangement (CVA), which a CBS cannot do. Although CICs work to the principle of one-share-one vote, it is also possible for them to issue a category of share that provides certain rights on a one-memberone-vote basis. 2.5 Barriers to community ownership i) Barriers for a CBS For a CBS there are a number of barriers: Withdrawable shares are limited to 20,000 at present although legislation has been passed to increase this limit, it has not yet been implemented. Football League and the Premier League rules do not allow clubs to be a CBS. Instead the club must be structured as a company in order to satisfy the Football League requirements. The reason for this is that a CBS cannot currently enter into a Company Voluntary Arrangement (CVA), which allows the company to continue to trade under the direction of an administrator, whilst simultaneously protecting the interests of major creditors (including within football) from further losses. This restriction on CBSs places a premium on them being run sustainably to live within their means something football authorities are also seeking to encourage via points deductions as punishment for entering a CVA. Although there is a Government review of insolvency arrangements for societies, the removal of the restriction on CBSs by the leagues would both overcome the barrier and allow a form of football club that has to operate sustainably. To address these barriers, Supporters Direct would like to see: An increase to the amount of withdrawable shares possible in a CBS The Football League and the Premier League allowing clubs to be formed as a CBS. ii) Barriers for CICs There are some drawbacks with each form of CIC as a structure for democratic supporter ownership in football. A CIC CLG cannot issue share capital, and instead must rely on some form of debt instrument (loan stock, debentures, bonds etc) if it were to seek capital from its members. They cannot issue withdrawable, or other, forms of shares. However, a supporters trust (formed as a CBS with withdrawable shares) could be a member of a CIC CLG and provide capital for it. A CIC CLS can issue shares but it cannot offer these shares to the general public, only privately, because Section 755 of the Companies Act 2066 prohibits a CLS from making a public offer of securities, including shares. A CIC CLS wishing to issue shares to the public must first convert into a CIC Plc. A CIC Plc would face even more onerous regulation if it were to make a public offer of shares, as any Plc has to have a minimum of 50,000 paid-up share capital, and meet more stringent audit and public reporting standards. Larger share offers may also be subject to financial regulation under various Prospectus Directives and Orders, resulting in high compliance costs. Partly for this reason there are currently no CIC Plcs. All CICs are subject to the Financial Services and Markets Act 2000, the Financial Services Act 2012 and all associated regulatory orders regarding financial promotions. These regulations allow for a number of exempted categories of investor such as self-certificated sophisticated investors, high-net-worth individuals, and common interest groups, which may include pre-existing members of a club or supporters trust. For both CIC CLS and CIC Plc forms, the other main disadvantage compared to a CBS is that they are not democratic, meaning that those with larger shareholdings have a greater say, unless their governing documents are amended to address this issue.

9 9 This latter barrier could be partially addressed by establishing two classes of share in a CIC, with one class of investor share designed with specific rights to meet the needs and interests of individual investors, and the other class of supporter share aimed at fans, or held by a supporters trust. 2.6 Other ownership structures in football Apart from those clubs that are already community owned, there are four main types of ownership structure in football. It is important for supporters groups to understand these structures, because they provide the starting point for any plan to increase supporter share ownership. The four main types of ownership in football are listed below. i) Community Amateur Sports Club Many non-player paying football clubs in the UK are small community organisations, run by volunteers, and are registered with HMRC as Community Amateur Sports Clubs (CASC). The advantages of this status are that they: can be democratic one-member-one-vote structures; qualify for 80% business rate relief; can attract Gift Aid on donations; and they have exemption from various taxes. There are over 550 football clubs registered as CASCs. The main disincentive to registering as a CASC is the fact that once registered, a club cannot undo the status, even if it is promoted to higher levels of the football pyramid which are incompatible with amateur status (a CASC cannot pay players, even if it promoted to a semi-professional league). A CASC registered club can be legally structured as an unincorporated association, a CLG, or a CBS. It must also practice open membership, admitting anyone who is eligible to membership. Consultation on how the CASC structure can be made more flexible is currently underway. Proposals include a relaxation to the rule preventing CASCs from employing professional players, and arrangements for placing any semi-professional activity into a trading subsidiary organisation. ii) Company Limited by Guarantee A Company Limited by Guarantee (CLG) is a type of company which instead of requiring its members to hold share capital has named guarantors who accept a limited liability for the debts of the company (usually a nominal amount such as 1). This form of company is often used to incorporate charities, because they do not provide for any shareholder interest, and by other non-charitable, not-for-profit organisations such as CASCs. The weakness with this form of incorporation is that it makes no provision for equity finance, nor is there any requirement to prioritise public or community interest or benefit. The major drawback with this form is the lack of any scope to raise equity capital for investment in the club. iii) Private Companies Limited by Shares A private company limited by shares (CLS) is the most common legal form in professional and semi-professional football. The Football League insists that all clubs it admits must be structured as companies, so that they can be subject to CVA procedures. The CLS form is highly adaptable, provides limited liability status, a clear structure for membership and the ability to raise capital through share issues. However, any issue of shares has major regulatory costs and may require the club to convert to a Plc if the shares are offered to the public (see Section 2.5). In football most CLSs are owned and controlled by a miniscule number of people, whether supporters or not. However there are a significant number of clubs that have, over the years, made shares available to supporters, although this usually only amounts to a tiny minority stake offered privately, which carries no influence over the majority shareholders. These shares tend to have very limited or no value because the shares are not listed on a stock exchange and there is no other secondary market for them, especially if shareholders receive no dividends, as is often the case. Even where there may be hundreds, and possibly thousands, of supporter shareholders in a club, unless they collectively own more than 10% of the share capital, are organised or act collectively, their influence over the club will be negligible, and their shares will probably be worthless. iv) Public Limited Companies Whilst this form does allow clubs to sell shares to the general public, and for their shares to be listed on a stock exchange, there is currently little appetite for this form of ownership structure in English football. The Plc form briefly became popular in football in the early 1990s, but since then most Plc clubs have reverted to being private limited companies. Among the handful of clubs that are still structured as Plc s, only Arsenal is listed on a UK stock exchange, with the others held in private hands, or listed on foreign stock exchanges. The Plc form is more heavily regulated than a private CLS and it has to comply with much higher standards of disclosure, making it unattractive to most majority-stake owners. Even though Arsenal FC is listed, there have been no shares traded through the exchange in recent times.

10 10 Case Study Portsmouth FC This case study of Portsmouth FC highlights many of the challenges confronting supporters groups that attempt to take a club into community ownership. It illustrates many of the key barriers identified by this report, and provides a context for understanding the importance of the key recommendations. The case study also highlights the serious problems of financial instability, irresponsible ownership and an inadequate regulatory framework within English football, although it should be noted that the regulatory framework has improved since the last episode of failure at Portsmouth FC. A Chequered History Portsmouth Football Club, established in 1898, stands as a cautionary tale of contemporary football. Its ownership history in recent years is as chequered as any in the game and its survival has on more than one occasion been due to the activities of supporters. In the last 15 years ownership of the club has passed between no less than nine individuals. From 1988 Portsmouth passed from John Deacon, to John Gregory, to Terry Venables and then back to Gregory s son in a matter of eight years. It went into receivership at the end of The club was then rescued by Serbian-American businessman Milan Mandaric, who had no previous ties to the club. But it was no rescue: In 2006 Mandaric sold the club to Alexandre Gaydamak, winning the FA Cup in It was then sold to UAE businessman Sulaiman Al Fahim. Al Fahim struggled with debts that were partly as a result of excessive investment and he sold the club on to Saudi businessman Ali Al-Faraj. In February 2010 the club entered into administration again, only to be saved by a major creditor, Balram Chanrai. Chanrai sold the club just twelve months later, in June 2011, to Russian businessman Valdamir Antonov, retaining a 18.6m charge against the assets of the club. In January 2012, the club entered administration for the second time within two years, with estimated debts in excess of 100m. Supporters Rescue In 2012 the Portsmouth Supporters Trust (PST) resolved to save the club, with community ownership as the solution to the catastrophic events documented above. The appetite for this was demonstrated in a survey of 6,000 supporters. A scheme was launched inviting fans to pledge a 1,000 investment in PST (starting with a down-payment of 100) and discussions were also held with high net worth individuals. The PST plan was to create a new legal entity, Portsmouth Community Football Club (PCFC): PST would invest the share capital it raised from members in this new entity. Alongside this would be direct investment (of a minimum 50,000) by wealthier fans. PST would be the majority shareholder in PCFC, with community interests further protected by a shareholders agreement. In October 2012 the Football League announced that that PST had won their support as preferred bidder over Chanrai. By then, PST had received pledges from over 2,000 fans who had paid the initial deposit of 100. Eleven Presidents had pledged a further 1.5m, having already provided the administrator with 400,000 in cash to keep the club afloat. A loan of 2.75m, put together by PST, from local property developer Stuart Robinson, secured against the future ownership of the stadium, backed by a 1.5m loan from Portsmouth City Council. Chanrai however retained a 17m charge on the stadium, and refused PST s offer of 3m for it. Eventually, despite prolonged legal battles and counter offers, in April 2013 Chanrai accepted an out-of-court offer of 3m for the stadium, along with a further 450,000 for the release of a floating charge against the other assets of the club.

11 11 What is Portsmouth Community reserved matters which the Football Club? board may not action without a shareholders vote (issuing loan Portsmouth Community Football Club (PCFC) is a company capital, acquisitions, disposal of limited by shares. The majority of the shares are owned by the business or varying the rights Portsmouth Supporters Trust, raising more than 2m through attached to any shares). the eleven fans, known as Presidents, who have individually These reserved matters require a invested between 50,000 and 250,000 in shares, totalling 75% or 90% majority, depending about 1.6m. on which list they are in. PST has gained: The shareholders agreement also allows for PST to have at least 3 a community share issue, with a minority of shares held by A shareholder agreement in board members with the PCFC which precludes dividends Presidents also entitled to up to 3 and restricts the sale of shares Board places. as well as listing a number of

12 12

13 13 What restricted the development? There were a number of barriers to the development: i) In January 2012 PST only had limited resources and no significant cash reserves to be considered a serious bidder. It therefore needed the support of wealthier fans, who were committed to community ownership. ii) When PST decided to bid for the club it had to work hard with Supporters Direct to educate supporters about legal formats, raising capital and community shares. iii) Counter proposals for forming a Community Interest Company were tabled and the case for a Community Benefit Society structure had to be made, underlining the lack of knowledge and understanding about the capital-raising scope of both these forms. Also, Football League rules prevent a club being formed as a CBS (see section 2.2) so although PST can own the club, as a wholly-owned or majority-owned subsidiary, it could never be the club directly, unless PST itself was to convert its form to that of a company. The interests of larger investors could have been accommodated within PST s community share offer by allowing investors who wanted to exceed the 20,000 statutory limit on withdrawable share capital, to purchase transferable share capital, for which there is no upper limit. Alternatively, PST could have developed a parallel community bond offer which would also not have been subject to any investment limits. However, one of the consequences of having to establish the club as a company, in which PST has majority ownership, but less than a 90% stake, is that the investment does not qualify for Enterprise Investment Scheme tax relief (see section 3.1). The loss of this tax relief is a barrier to some fans investing, or investing more than they have done. What changes are required? i) Development Capital PST would have been in a far stronger position if it had been able to show how much its fans were prepared to invest in the club at the start. Proposals in this report, to create a Community Football Fund, would enable supporters trusts to demonstrate that their supporters had the financial wherewithal to bid for their clubs. ii) CBS Insolvency The government has announced that it is prepared to investigate making changes to the insolvency procedures for cooperatives and CBSs, so that they have an equivalent to the Company Voluntary Arrangement. This would clear the way for football authorities to recognise CBSs as an appropriate legal form for football clubs. iii) Awareness of Community Investment More needs to be done to promote the concept of community shares and community investment to the general public. The government has backed the creation of a Community Shares Unit, a joint initiative between Co-operatives UK and Locality, funded by DCLG, to develop this field of activity. The Unit must concentrate its efforts on ensuring that the public are aware of the options for community investment and community ownership of enterprises. iv) Buying Time Through Assets of Community Value PST benefited from the terrible financial problems at Portsmouth FC which discouraged other serious bidders coming forward, giving PST time to build a bid. More usually, much less time is available to supporters trusts, underlining the importance to use the Localism Act to get their clubs stadiums listed as Assets of Community Value (see section 4.2). The extension of the Localism Act to cover the sale of the enterprise, and not just the underlying property asset, would obviously make the six month moratorium period a far more powerful tool. v) Tax Relief People who bought community shares in PST did not qualify for EIS because PST was not able to raise enough capital to meet the EIS requirement that the enterprise must own 90% or more of any subsidiary that it is investing in. Although this restriction makes sense for private companies, it unduly restrains social enterprises entering into joint ventures. Consideration should be given to lowering the EIS qualifying threshold for subsidiaries to include majority-owned (50%+) ventures for CICs and CBSs.

14 14 Section 3: Raising Community Finance From a community perspective there are significant barriers to raising capital: The sheer amount of capital required to acquire and develop the club. Inherited debts and liabilities, especially where a supporters trust takes control of a club in administration or financial crisis. The speed at which capital must normally be raised. This section considers the three main forms of community finance: i) Community shares. ii) iii) Community bonds and loans. Community fundraising. All three forms of community finance have a part to play in securing and sustaining the community ownership of football clubs. Supporters trusts may need to devise strategies for sourcing all three types of community finance, or a combination of them. This section also considers the role of crowdfunding in raising all three forms of community finance Community Shares A growing number of clubs and supporters trusts are turning to their own members and supporters as a source of investment capital. Community shares 5 is a term coined by Locality and Co-operatives UK and refers to withdrawable shares issued by an Industrial and Provident Society. Section 2 of the report explained why the CBS structure was recommended by Supporters Direct for clubs and supporters trusts planning to raise community finance. Community shares are different to normal shares in that they: Operate under the one-member-one-vote principle, rather than one-share-one-vote no matter how many shares you own you have just one vote. Prioritise the delivery of community benefit over financial return. Limit interest/dividend payments to that sufficient to attract and retain the investment. Cannot be traded or transferred, but are withdrawable, providing the member with an exit route if they need to sell their shares. Are not subject to onerous and costly regulation that applies to shares in companies, including CICs. Supporters trusts and clubs that are structured as CBSs, and are planning to raise equity finance, thus have two forms of share: i) The membership share, which is not for capital purposes and has a nominal value (usually 1). This is neither transferable nor withdrawable and it expires if and when a member resigns or fails to pay their annual subscription. The membership share has full voting rights. ii) Withdrawable shares (only available to members) carry no voting rights, but do attract interest payments and are withdrawable (wherein the value of share is paid back by the CBS), subject to conditions and at the discretion of the society. This arrangement therefore allows clubs and supporters trusts to maintain a one-member-one-vote membership structure, whilst raising additional capital from members. Raising money in this way has become increasingly popular, helping to finance a wide range of community ventures from wind farms, shops and pubs to football stadiums. Since 2009, over 300 new industrial and provident societies have been established with the express intention of issuing community shares. In the same time period there has been 120 successful community share offers, raising more than 20m from over 20,000 members. The Community Shares Unit 6 (CSU) was launched in October 2012 funded by Department for Communities and Local Government (DCLG), and its steering group includes representatives from the Financial Conduct Authority, HM Treasury, the Cabinet Office, DECC, the Charity Commission and HMRC. In football, FC United of Manchester have raised 1.75m to date in order to fund a new stadium and community facility; Wrexham Supporters Trust raised over 150,000 to help develop infrastructure at their stadium; and Portsmouth Supporters Trust have raised in excess of 2m in community shares to take a majority stake in their club. Although financial return is not the primary objective of a community share scheme, some schemes have qualified for the Enterprise Investment Scheme (EIS) which means those that buy shares may claim 30% of the sum invested in tax relief 7. EIS is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

15 15 There are a series of conditions on which kind of enterprise and share issues that qualify for relief (including a maximum of 5m shares issued in any 12 months, and an upper size limit of 15m in gross assets and 250 employees) 8. EIS has been used successfully by a supporter owned club raising finance to develop its facilities (e.g. FC United of Manchester) but EIS cannot currently be used to support initiatives where supporters are aiming to secure anything less than a 90% stake in the club. This makes it more difficult to negotiate deals with the current owners of clubs who may be prepared to enter into joint ventures with supporters, or to promote other ways of enabling supporters to build up an influential stake in their club. Supporters Direct and the Community Shares Unit only endorse community share offers that can secure at least 50% plus 1 share in a football club 9 along with embedded rights to ensure the primacy of community benefit. Community shares are generally seen as a highly effective way of raising community finance because of the leverage it provides over other sources of finance, including debt and grants. Lenders prefer to lend money to enterprises with significant levels of shareholder equity, and public grant giving bodies see successful community share offers as strong evidence of public support and community engagement. Supporters Direct received a grant of 100,000 over two years from the Fans Fund, to establish its own community shares programme for clubs in the English National football system but also to explore the appetite from amateur sports clubs that may wish to become community benefit societies. It has so far raised about 2.5m of investment into English football. Key barriers for community shares are: The amount of withdrawable shares that can be held by an individual in a CBS is currently limited to 20,000, when many larger clubs have supporters who would be prepared to invest significantly above this limit. The lack of public awareness and knowledge of the IPS form and community shares can inhibit people from investing in an unfamiliar proposition. The time and cost of helping supporters trusts prepare to launch a viable community share offer can be too much for many groups. Many schemes will not qualify for EIS because they are not able to acquire a sufficiently large stake in the club. Key recommendations: Increase the 20,000 limit on individuals buying shares in a CBS (this is currently under review). Make special provisions in EIS to enable CBSs and CICs to qualify for tax relief when purchasing 50%+ 1 share stake in an existing club or enterprise. Finance Supporters Direct to provide development support to clubs and supporters trusts seeking to raise community finance, including via community shares. This could be provided by the Fans Fund or an alternative funding body. 3.2 Community Bonds Community bonds are another form of community investment, but instead of issuing shares, the club or supporters trust offers investors a bond, which is normally an unsecured debt instrument, and may carry a different name, such as a loan note or loan stock. Bonds normally have a fixed date when the bond will be redeemed, and usually carry a fixed and pre-stated interest rate (although this is sometimes discretionary). Bondholders usually have no voting rights and are not required to be members of the enterprise issuing the bonds. AFC Wimbledon was the pioneer of this form of finance for community-owned football clubs. In 2004 the Dons Trust launched a 4 year bond with a discretionary interest rate of up to 4%. Approximately 60 people purchased bonds, which in total raised about 300,000. Many of the bondholders elected to receive little or no interest, reducing the cost of the bonds to less than 2% per annum. Many of the 60 bondholders have also decided to extend the redemption periods of their bonds, relieving pressure on the Dons Trust to find replacement capital. Although bond offers by companies and CICs are regulated in the same way as any other financial promotion, CBSs are exempt, as long as the capital is used to pursue the society s business purpose. One of the advantages of bonds for CBSs is that there is no upper limit on the amount of bonds an individual can purchase. The drawbacks include the commitment to a fixed timetable for repaying the bond, and the limitations it places on raising other forms of debt finance. The Government is currently consulting on the introduction of a new incentive for social investors called Social Investment Tax Relief (SITR), which will focus on unsecured debt. Supporters Direct welcomes this consultation, and the proposal to incentivise unsecured lending to social enterprises, including CICs and CBSs. A generous tax relief may enable social enterprises to set terms that are more favourable to

16 16 themselves, perhaps linking it to the future profitability of the enterprise, rather than committing to a fixed repayment schedule. Key barriers for community bonds are: Ensuring that bonds can be repaid and the club still maintain a sustainable business plan. Key recommendations: Support is provided via Supporters Direct to supporters trusts with preparing adequate business plans, that ensure bonds are repaid. Set SITR rates at a sufficiently high level to encourage lenders to agree to loan repayment schedules that support the delivery of community benefit such as flexible terms linking repayments to profitability rather than fixed terms. 3.3 Community Fundraising Traditional fund raising through donations, events gifts etc. - can be an important element of collective supporter shareholding because it can be spent on high risk and developmental activities (such as developing a community shares scheme) and it does not have to be repaid. This is important because high risk costs in capital schemes can be as much as 10% of the capital required and much of that money will be spent on non-recoverable expenses, such as professional fees. Further details on how clubs have done this is contained in an earlier Supporters Direct report 10. Both FC United of Manchester and Wrexham Supporters Trust raised in excess of 0.4m through fundraising over a period of several years to assist with the development of capital finance raising initiatives. Key barrier: Despite successful examples, raising funds for high risk or developmental expenditure remains a key barrier for supporters trusts, especially if those funds are needed quickly or in an unexpected crisis situation. Key recommendations: Social Investment Tax Relief is extended to include tax relief on donations to CICs and CBSs development finance funds. Supporters trusts need advice and support to develop community fundraising. Supporters trusts need to have access to developmental funds to support the creation of a community share scheme. This would be at risk but could be provided on a repayment basis should the scheme be successful, thus buying time for supporters trusts. 3.4 Crowdfunding The last three years has seen the mushrooming of crowdfunding internet sites. Crowdfunding is based on the principle of attracting a large number of people to contribute small amounts of money to finance a project, scheme or enterprise. Research commissioned by NESTA identifies four main types of crowdfunding proposition: i) Donation crowdfunding supporting good causes for no personal benefit. ii) iii) iv) Reward crowdfunding, where funders are incentivised by rewards, or are pre-purchasing a product or service. Crowdfunded lending, including aggregated forms of peer-to-peer lending. Equity crowdfunding, offering share capital in enterprises. To date there has been very few attempts by supporters groups or trusts to use crowdfunding, the only known example being a failed attempt in 2012 by supporters of Darlington FC to raise equity finance to rescue the club. More recently the CSU acquired the equity crowdfunding website org.uk. This site originally focussed on IPS community share offers made by renewable energy initiatives. The CSU re-launched the site in June 2013 as a pilot project, to test how the site might assist IPS community share offers in a range of different trade activities.

17 17 Crowdfunding could be a useful tool for many supporters groups that want to raise community development finance quickly. It could provide a simple and easy-to-use platform for supporters, and reduce the administrative burden on supporters trusts. Selective use of crowdfunding sites could help in the following ways: a) Donation crowdfunding could be used to raise relatively small sums, of between 2,000 to 10,000, for specific development tasks and projects, such as paying for feasibility studies, professional valuations, planning applications and business plans. b) Equity crowdfunding could significantly reduce the administrative burden for supporter groups that are ready to launch a community share offer. c) Crowdfunded lending might be an appropriate way of marketing community bonds, subject to regulatory constraints. Key barriers: There is very limited experience of using crowdfunding sites to generate development or investment finance for supporters groups, so there is no evidence of what the potential benefits of this approach may be, or what impact it may have on supporters trusts. The regulatory constraints on raising debt or equity finance via crowdfunding websites are not fully understood, particularly regards the restrictions on private companies making public offers of securities. The community benefit purpose of funds raised by this method need to be better protected/ensured. Key recommendations: Supporters Direct should work with its member organisations to test the scope of donation crowdfunding to raise development finance for supporter share ownership schemes. Supporters Direct should work with the CSU to pilot a football-related community share offer. Supporters Direct should work with the CSU to explore ways in which the community development/ capital fund raising purpose of crowdfunding can be ensured.

18 18 Section 4: Share Ownership and Financial Regulation The long term ambition of many supporters trusts is to secure ownership of, and influence over, the football clubs they support. In pursuit of this goal, it is important for supporters trusts to consider all the mechanisms open to them for acquiring and developing a stake in the clubs they support. Clubs in the Football League and Premier League are all structured as companies, mostly private companies limited by shares, although there is a minority of clubs which are owned by public limited companies, and even fewer are listed on a stock exchange. A listing on a stock exchange normally means the shares can be bought and sold by the public, although in the case of Arsenal, no shares have been available for sale for the last twelve months. Manchester United shares are listed on the New York Stock Exchange. This section examines the scope for promoting supporter share ownership through Fan Share Schemes, and the barriers to extending this approach to private limited companies, principally stemming from financial regulations. 4.1 Financial Services and Markets Act (2000) The public marketing and sale of shares, bonds or other forms of financial securities in a company is rightly a heavily regulated activity. The Financial Services and Markets Act (FSMA) 2000 provides the legal and regulatory framework governing the public offer of securities, including shares and bonds. This is supported by a raft of regulations, orders and directives governing financial promotions and is such a complex area organisations seeking to make a public offer will require professional and legal advice. The Financial Services Act 2012 sets out the responsibilities of the Financial Conduct Authority (FCA), including responsibilities for financial promotions, which it inherited from the Financial Services Authority (FSA). Section 21 of FSMA 2000 sets out restrictions on how financial promotions can be made. Essentially, the contents of any form of communication encouraging the public to make an investment must be approved by a FCA authorised person, unless it is covered by an exemption. It is important to note that this requirement does not apply to withdrawable share capital in a community benefit society. There are a large number of specific exemptions, laid out in the Financial Promotions Order These include exemptions for: High-net-worth individuals. Sophisticated investors. Common interest groups. The definition of these terms, and the scope of the exemptions, is not straightforward, and any organisation seeking to apply these exemptions to its offer is advised to obtain professional advice. Section 85 of the Financial Services and Markets Act 2000 requires organisations making a financial promotion to publish a FCA approved prospectus if they are offering transferable securities. The Act and the FCA s prospectus rules set out in detail what a prospectus must contain and the approvals required for such a document. This requirement does not apply to non-transferable securities, such as withdrawable share capital in community benefit societies. There are also exemptions for the following: Bonds issued by charities, community benefit societies and other non-profit making bodies. Shares and bonds issued by community benefit societies, as long as the money raised is used solely for the purposes of the issuer s objectives. Offers of transferable securities where the offer is being made to fewer than 100 people, and the total being sought is less than the sterling equivalent of 2,500,000. However, it is important to remember that although an offer might be exempt from having to issue an approved prospectus, the organisation promoting the investment opportunity may still need an FCA authorised person to approve the contents of any communications about the offer. There are significant legal and regulatory barriers confronting football clubs that may want to offer shares to supporters and supporters trusts. Some schemes, such Arsenal Fanshare, are fully compliant with these regulations, and provide supporters with sufficient levels of information to fully understand what they are investing in. Other schemes, such as the Wycombe Wanderers Bond offer, are structured to meet the exemptions, with the consequence that they are not fully accessible to members of supporters trusts and all supporters of that club.

19 Fan Share Schemes Where shares are available to purchase in a limited company structure either in a Plc structure or through private sale it can open up an opportunity for supporters to purchase shares: A Plc can make shares available either through a public offer, or because their shares are traded on a stock market. A CLS can make shares available on a private basis or have unallocated shares from a previous issue offered privately. This poses two challenges for collective supporter shareholding: i. It allows individual fans to purchase shares but is less straightforward for supporters to collectively own shares. ii. The cost of shares, or of acquiring small numbers of them given broker fees, can be prohibitive for fans However, a fan share scheme is a means by which shares can be acquired collectively as well as allow fans to build up their investment over time. An early example of this, in the mid-late 1990s, was an initiative by the Independent Manchester United Supporters Association that helped members get individual share holdings in Manchester United Plc and reduce brokers fees through a scheme that bought them collectively, allowing a large number of supporters to access the club s AGM and accounts. A more recent example is the Arsenal Fan Share scheme launched by Arsenal Supporters Trust, which helped fans overcome the high cost of Arsenal shares when they were available, and also fostered a collective shareholding. Arsenal s Fan Share scheme works as follows: The supporters trust set up a Fan Share organisation. (This could potentially be done within the supporters trust, but experience suggests that due to the current financial regulations and liabilities this may be more easily achieved as a separate society). Supporters join the organisation and make monthly donations to it (supporters trusts can set minimum and maximum payment per month). The Fan Share scheme then purchases shares in the club on behalf of its members. Depending on the price and availability of individual shares in the club, each member will have an account that holds their money and whilst shares are bought and allocated to/owned by them, they are voted on collectively by the scheme. Shares are voted collectively at the club s AGM, with voting dependent on the membership (scheme contributors). The scheme has so far raised just under 2 million from 2,000 subscribers with an average monthly contribution of 50. Their main issue now is the lack of liquidity for shares available. The advantages of this approach are that it: Can give a wider group of supporters access to share ownership. Help maintain some collective control of those shares. The disadvantages of this approach are: Regulatory costs can be prohibitive. It is dependent on shares being publicly available, which for the vast majority of clubs they are not so would have been more suited to a time when more clubs were Plcs. In Arsenal s case it is the Fan Share organisation, and not the trust, that controls the shares. 4.3 Privately-owned football clubs There are currently no fan share-type schemes at other clubs, partly because of the availability of shares and despite the existence at some clubs of many small shareholders. There are numerous examples of football clubs, structured as private companies limited by shares that have raised share capital by directly selling shares to supporters, many of which are historical. For instance, when Everton Football Club incorporated as limited company in 1892 it had 259 member shareholders, with no one shareholder owning a significant number of shares. Today, Everton has over 1,500 shareholders, although just five of these shareholders collectively own 80% of the shares. This is similar to other clubs and in nearly all these cases, there are a small number of shareholders who own the majority of the shares, which means that the majority of shareholders have little or no say in how the club is run.

20 20 Supporters Direct would like to see: Mechanisms by which supporter shareholdings could be aggregated in a collective organisation such as a supporters trust. Development of succession share ownership plans to transfer shares from large shareholders to appropriate collective supporters organisations (in which supporters could invest over time). Both of these would be mechanisms through which collective supporter ownership could be increased, whilst avoiding costly and burdensome financial regulation. 4.4 Key barriers: The scope for developing more Fan Share type schemes is dependent on football clubs and their owners making shares available for purchase. There appears to be little appetite currently among club owners to do this. 4.5 Key recommendations: Football clubs should be encouraged to engage with supporters trusts who can develop Fan Share type schemes which endeavour to give a collective and democratic voice to minority shareholders. Existing owners of football clubs should be approached about developing long term ownership succession plans for their clubs, allowing supporters trusts to purchase shares on behalf of members. Exemptions from FSMA (2000) for fan share type schemes may help, but are unlikely to be relevant in the vast majority of situations. However, any expemptions should only be provided if schemes meet specific criteria, namely: i. That the shareholding is collectively owned and democratically controlled, preferably within a CBS. ii. That the vehicle which owns the shares prioritises the community benefit function of them. Even if there was an appetite among football club owners to sell shares to supporters, it would be onerous and expensive to do this through a public offering, but there are ways they could transfer shares to supporters trusts which would overcome such barriers. iii. That no personal financial benefit can result from the disposal of shares held (for instance so any proceeds go to the supporters trust/cbs not to individual members).

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